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SQM Research Ratings Update - January 2019
Welcome to 2019!  
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SQM Commentary

Analysing the Shift in the Global Macro Environment
There is currently a fundamental shift taking place in the global macro environment. SQM research has looked at several factors to analyse the fundamental environment, what this means and will it persist.
Global short term rates, for the most part have continued to track higher as the US, Canada, UK accounted for the largest 1-year change on short term rates. Widening rate differentials in favour of US have been profitable for funds like P/E Global Alpha, which was positioned for USD strength.

On a global basis, net changes in central bank policy rates (%, hikes minus cuts) show that monetary policy is tightening, in both developed and emerging markets.
Monetary tightening is occurring in place of falling-to-flat inflationary and GDP expectations, in both developed and emerging markets.

The ratio of Investment Grade 5Y spread to High Yield 5Y spreads, shows the markets preference for investment grade, risk-off sentiments. Jan 2018 proved to be a short term inflection point where spreads also started rising in markets like Japan, Australia, Europe and the bottom of the VIX Index.

The yield curve continued to flatten towards the end of 2018 as represented by the US10s and 2s. Risk-on assets such as equities and credit sensitive bonds have both produced mixed returns outcomes following an inversion. Whilst its ability to signal recessions is mixed, there are various things that are more assured. A flat to inverted yield curve is an important indicator of risk sentiment and should be taken into account when producing economic and inflationary forecasts. Active managers can use the change in the yield curve to find opportunities in high quality investment grade bonds and credit at attractive valuations.

Inflationary expectations exhibited by commodities are also falling as oil and energy indices make significant falls.

This environment of rising global rates and spreads along with falling inflationary and GDP expectations will contribute to produce greater risk-off sentiments and provide headwinds to equity markets. Over-leveraged economies and companies exposed to US Dollar denominated debt will find it costlier to service this debt given the cost of funding is rising. This is occurring during a time where the Fed is expected to continue its balance sheet run-off, reducing the amount of US dollars in the marketplace, making it a costly exercise to refinance debt. This is a negative for liquidity in the global marketplace and will contribute to risk-off sentiments.
For Australia, this is a precarious development given its current account deficit nature of the economy. In Australia there is a gap between domestic savings and investment. This gap has historically been filled by overseas capital, making Australia a capital importing oriented economy. Given the rising interest rate differential between US and Australian yields, this gap is going to be harder to fund. This can lead to various outcomes starting from capital outflows, AUD depreciation and consequently imported inflation. This puts the RBA in a precarious position as it balances a mortgage debt laden economy with its mandate of full employment, economic prosperity and stability of the currency.
As risk factors increasingly spell trouble, market participants are expecting central banks to come to the rescue if there is widespread volatility. This may prove to a costly position given on a global basis, monetary policy is tightening, reversing an easing trend that was evident over the last 10 years. Which begs the question, will this environment persist?
SQM Research is of the view that the current environment will persist and answers to all to the questions of how we got here are in the past-maintaining easy monetary policy longer than we should have. In order to get the inflation machines going, commodities (mainly oil) will have to drop further to spark industrial activity or central banks reverse their tightening policies.
The major central banks- ECB, BoJ and Fed are all either continuing their tightening schedule (Fed) or about to call an end to their respective programs (ECB) or stealthily reducing their easing (BoJ). This tightening phase is unlikely to reverse quickly given accommodative monetary policy has been the trend for the last 10 years.
SQM Research's Top 5 SQM Rated Funds for December 2018

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SQM Research's Market Benchmarks for December 2018

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SQM Research's Top 50 ETFs for December 2018
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Ratings Table
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For further information: 
Rob da Silva - Head of Research
SQM Research
Tel:      (02) 9220 4606

Louis Christopher - Managing Director
SQM Research
Tel:       (02) 9220 4666

About SQM Research 
SQM Research is an independent property advisory, ratings and forecasting research 
house which specialises in providing accurate property related advice, research and data to financial institutions, property developers and real estate investors. For more information please visit
Research Methodology
In general, the assessment approach adopted by SQM Research incorporates a combination of qualitative and quantitative research techniques to assess property investment products. Information generated is passed through the SQM Research assessment model at the completion of the assessment process. The assessment model generates a product score, which correlates to a specific star rating (out of a maximum of five stars). Each star rating covers a scoring range, allowing products to be ranked within quarter star increments.
Following are descriptions for each of the star ratings, which have been developed as a guide for dealer group research teams and investment committees:
4.5 stars and above – Outstanding. Highly suitable for inclusion on APLs.
4 stars to 4.25 stars – Superior. Suitable for inclusion on most APLs.
3.75 stars – Good. Consider for APL inclusion.
3.5 stars – Average. Consider for APL inclusion, subject to advice restrictions.
3.25 stars – Caution required. Not suitable for most APLs.
3 stars – Strong caution required. Not suitable for most APLs.
Below 3 stars – Avoid or redeem. Not suitable for APL inclusion.
Hold – The rating is currently suspended until SQM Research receives further information. A rating is typically put on hold for a period of 2 days to 4 weeks.
Withdrawn – The rating is no longer applicable. Significant issues have arisen, and investors should avoid or redeem units in the fund.
The rating contained in this document is issued by SQM Research Pty Ltd ABN 93 122 592 036. SQM Research is an investment research firm that undertakes research on investment products exclusively for its wholesale clients, utilising a proprietary review and star rating system. The SQM Research star rating system is of a general nature and does not take into account the particular circumstances or needs of any specific person. The rating may be subject to change at any time. Only licensed financial advisers may use the SQM Research star rating system in determining whether an investment is appropriate to a person’s particular circumstances or needs. You should read the product disclosure statement and consult a licensed financial adviser before making an investment decision in relation to this investment product. SQM Research receives a fee from the Fund Manager for the research and rating of the managed investment scheme.
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